A high-quality financial report may reflect:
Why is B correct? Shouldn’t it be A? I mean if we are dealing with a high-quality report, management probably has smoothed the earnings or?
CFA Practice bank website
the quality of earnings versus the quality of reporting cause confusion. Smoothing earnings (it means not reflect the true picture of earnings, for example, last year net income 100, this year net income 80, however, can underestimate impairment (+20) to get 100 (by manipulating figures), it is smooth but it is not true.) 3 underestimate impairment can be a way to manipulate earnings.
The distinction here comes down to high-quality earnings versus high-quality reporting.
A high-quality report may have low-quality earnings. That is fine and normal. Not every company will have quarters or years of high-quality earnings, but that doesn’t necessarily mean that their reporting is also low-quality.
Earnings smoothing is the practice of making earnings seem better than it really is in some periods, while making earnings seem worse than it really is in other periods, with the goal of making earnings seem less volatile than they actually are.
This is a form of misrepresentation, so if a company does this, then they are not producing a high-quality financial report.
Thanks!